Is investing in Gold a good option for middle class

Financial Planning

If you are an avid follower of content on the internet or investment-savvy or always keep yourself updated with the latest news, you would have known that Paytm has come up with the concept of investing in digital gold. Yes, you heard that right – from digital or wallet money we have now moved on to digital gold.

India is one of the largest consumers of gold in the world and Indian’s love for gold has never really taken a backseat. Be it a religious festival, an auspicious occasion, marriage in the family or planning for children’s marriage, gold is the most sought after commodity. From using gold as a means of adornment or an investment instrument, or even both, we have always held it in our portfolio either physically in locker or in our demat accounts.

Gold as an investment instrument

According to a 2016 report by World Gold Council, Indian investors view gold bars and coin as a safe investment, almost at par with savings accounts. Here are a few ways in which Indians invest in gold:

Gold Jewellery:

Indians love to invest in gold in one of the traditional ways, gold jewellery. Since gold is considered to be a status symbol, many people love to wear gold jewellery too. They purchase gold jewellery and wear it on a daily basis or on religious or family occasions and sell it later when gold appreciates in price or if they face a cash crunch. The gold rates are a key determiner of how the rates of a jewellery piece should be. When the gold rates are high, the cost of the jewellery increases and when they are low, the cost decreases.

It is easy to purchase or sell gold jewellery in India unlike real estate assets and other investments as it does not require a lot of documentation. The Government has recently announced that submission of PAN Card is mandatory for purchase of gold for more than 2 Lakhs. Lesser or no documentation is one of the primary reasons for purchasing gold jewellery as investment particularly by the women members of the family. Banks provide locker facilities where people keep their gold jewellery as they find it safe when it is not in use. Gold jewellery is usually made out of 22 carat gold while 18 carat gold is used to make diamond-studded gold jewellery.

Gold Coins and Bars:

When it comes to investing seriously, many people prefer to purchase gold coins and bars. Leading banks and jewellers sell gold coins and bars that the customers can purchase with minimal documentation. These gold coins and bars often come with a certification to endorse the authenticity and purity of gold. The certificate attests that the coins/bars are made out of 24 carat gold, which is its purest form. Gold rates have a more potent say in the price of gold coins or bars as compared to jewellery. This is because the coins and bars are pure gold and the prices can easily move with the gold rates. Jewellery, on the other hand, includes other precious stones or even diamonds whose rates move differently than that of pure gold rates.

Please note that gold rates differ if the carat is different. For example – 22 and 24 Carat gold rates are different.

Gold bars and coins can be bought in multiples of .50 gram ranging from .50 gram to up to 1 kg. One of the advantages of investing in gold bars or coins as compared to gold jewellery is that the buyer does not have to pay any making charges.

E-Gold:

Since security can be an issue for many people when it comes to gold, the option to invest in e-gold or digital gold is also available. These are called Gold ETFs. No physical gold is traded on the National Stock Exchange (NSE) and yet investors can reap the benefits equivalent to investing in physical gold as the E-Gold captures the price of physical gold and there is no price difference between the E-Gold and the physical gold. You do not have to worry about keeping the gold safe in lockers or hidden drawers as Gold ETF is held in your demat account along with other securities.

In the recent past, the Government of India has started issuing Sovereign Gold Bonds to investors desirous of buying Gold Bonds. Customers also earn annual interest @2.5% payable semi-annually, when they decide to invest in such gold bond schemes issued by the Government of India. These bonds are easy to buy and sell as well.

The tenure of the bond will be 8 years with an option of exit from the 5th year.Any capital gain arising out of the redemption of gold bonds is tax exempt.

The minimum permissible investment will be 1 gram of gold and the maximum is 500 grams per person per fiscal year.

Is gold a good investment option?

To evaluate a commodity’s or a product’s investability one need only look at its returns. So, for instance, till some time back FDs,especially tax-saving FDs, were on top of middle class’s investment list. However, now with FD returns hovering around 7%, the product has lost its sheen. Another instrument that always seemed to touch the chord with middle class investors was Public Provident Fund (PPF). But this too paints the same picture as that of FDs as the small savings rates in India are now reset every quarter and in the last 4 quarters every quarter the interest rates have been reduced. As a result, middle class investors may find more comfort in investing in gold.

One thing that needs to be kept in mind when investing in gold is that one has to be invested for the long term and not short term. Gold is a cyclical investment, therefore, to expect the metal to be always high-performing will not be right. So, if you are not looking for immediate results and are a patient long term investor, gold can be one of the instruments to invest in.

How much should you invest in gold?

One thing that is certain about investing in gold is that the metal is there to help you during times of uncertainty or crisis and a good hedge against inflation. Therefore, it should be treated as one of the investment instruments and not the only investment instrument. Gold should be a part of your portfolio irrespective of whether you belong to the middle class or not. An ideal investment portfolio should only allocate 5%-10% of the overall portfolio to gold.

To sum up, while investing in gold is a good option for middle class it should not be the center of their financial planning and investment strategy but can be used as an asset allocation and hedge against inflation tool.